Question

Given the following economies: Countries A and B have two factors of production- labour and capital, which have some degree of
substitutability. Country A is relatively capital-abundant. They each have the ability to produce two goods-
X and Y. Production of X is relatively capital-intensive. Technology and tastes are identical in countries A
and B. Consider the following four cases.
I. An increase in A’s capital stock
II. An increase in A’s labour supply
III. An increase in B’s capital stock
IV. An increase in B’s labour supply
For each of the four cases:
a) Draw the new PPF (with the original PPF as well, for reference)
b) Show any changes in the relative supply curves for each country
c) Determine the effects on the terms of trade for each country.

Answer 1

of production - laba (L) There and are two factor Capital CK) → - Country A is k abundant Country B t o L abundant a less k abundant, Two good X (k intensive) l Y ( L intensive) are produced by both nations . Technology ď tastes are identical in both the nations Case Good y CK Intersive) 130 - i This ( This is an is an example of Biased enou . Le growth initial PPF When I stock res , ppf shifts to right but nou ayu: Good *t tirteestue) 4060 - (PPF of Country A) - ol with the increase in A's capital stock, its PPF shifts to the right. (but mou towards good Y sincu, capital is used in the production of both the goods x ay but output of good y (k intensive grows faster than output of good & CL intensive)

increase in A's labai supply. Case 2 : An - Good Y GK interesive) 901 So initial PPF when L 40 70 y food *t tuteustur) asince, L is used in prod" of both goods, output of both goods inueases with an increase in L supply but the increase in output of good to would be more than the increase in good y. Case 3: An increase in B's capital stock i Puitial PPF Pinal PPF : - > Good

Page An increase in B's labai supla Case H : Good Y initial PPF New PPE. - Good x Impact on TOT with facto quouille ! leads to تالم than change in B'S factors the offrcome Good Y Case 1: 4 in As K stocle reast p in prod" of good grun hat y C expotable good) watu 1 in pood" of good there is no X (impotable good) ber une country B tot finital) o contry A offer cauve t new tot Her growth is expoul biased) But volume of - Good X hade has (1) 1 in supply of K - as a result belu of k ie rate of interest would fall. There would also be a fall in puce of good y relative to good X

23 there is An increase in no change in B's capital stock (given factors of a country) poffu cuve of B 400 y bu can new offr wwuß New to е — к или A Good with î in k stock in B's nation, the prod" of its importable good will increase moi then of its exportable good as a result the Beece of its imports would fall an relative to exports and hence its TOT will become favorable a with p in Iletwand as a falls but k stock result turns of offer cure of B shifts volume of hade hade ie Price of poi Price of import 0 auses.

for same quantity of good y , earlier now country A would be getting leun good X . i. TOT has become unfavouable with the growth in Capital stock. Case & An increase in Goody B's ven that there i laba supply is no charge nity B offer cure in A's factors) . тут w obbл шд e%B Te fountry A offer can il new tot (Heu growth ú epbort blased) But volume of trade a Good I with 1 in labai supply in country B, ( specializing in, good & which is Lintensive theu would be fall! I a labor cost a wage rate which will further lower the price of good X. such that for I even wit of good x, now it will be able I to act lesser units of good Y. TOT has I become unavomable . ()

CHANGES IN RELATIVE SUPPLY CURVES An increase in A's K stock (b) Case ! ; hate of int . A Supply of k New Sk with then Pinkstock, a i din rate : of interest A Demand het Capital QK on Care : wage hati Rika An increase in A's I supply . with p inf, there is d in wage rate W2 > figo) e (2) case (3) (4) can be drawn respectively for similarly for the country